Retirement Planning

As recently as 20 years ago, a financially secure retirement was based on Pension Income, and personal savings. Today, companies are reducing or eliminating their defined benefit plans; politicians are discussing future reductions in governments benefits.

These new patterns for the accumulation and distribution of retirement assets make financial planning an ever-more-complex challenge for today’s and tomorrow’s retirees.

Saving for retirement involves a lot of careful planning. Not only do you have to ensure your savings will be sufficient to fund your future need for income. You also need to make sure that your savings last as long as you need it.

Over the past decade, the conventional approach to retirement planning has shifted. Retirement planning used to focus exclusively on saving money to reach a “number” that’s enough to live on in retirement.

There are a number of factors that investors approaching their retirement need to think about;

How can I be certain I won’t outlive my money?

How do I maintain my standard of living over 30 years?

How can I draw an income and grow my money at the same time?

How can I protect myself from a significant market decline?

However, as millions of baby boomers are reaching retirement age, they are faced with the challenge of what to do with the money they saved—to make it last a lifetime. Retirement planning today is a lifelong, evolving journey. It’s no longer just about accumulating a retirement nest egg, but also about having a plan that optimizes your retirement income to provide you with reliable income throughout your life, regardless of how long you live. This means the investment and savings strategies you used to accumulate wealth need to be adjusted as you prepare for and enter retirement.

This has led to a shift to expand retirement planning from a sole focus on investments to a broader, more comprehensive focus that includes solutions designed to optimize your income while managing both your personal and financial risks.

Saving for retirement may span more than 40 years and retirement itself can last more than 30 years. Do you have a plan for creating a sustainable retirement income stream?

Retirees must prepare to live from their retirement income for a period of 30 years or more. Is your current retirement strategy positioned to allow you to maintain your lifestyle for such a long period of time? It is essential to have a plan that guarantees you a retirement income for your entire life. The stakes are high during retirement—steady employment can no longer shield the investor from relying upon savings for income.

Retirement Risks

Longevity Risk

Stock Market Risk

Inflation Risk

Life expectancy in Canada is one of the highest in the world

Compared to other industrialized countries, Canada has one of the highest life expectancies at birth. In the United States, for example, life expectancy (74.8 years for males and 80.1 years for females) was, in 2003, more than two years lower than that observed in Canada, for males as for females.

Life expectancy worldwide in 2000 (63.9 years for males and 68.3 years for females) was well below that of the population of Canada and other industrialized countries. In 2000, the gap between life expectancy in Canada and in the world as a whole was 12.7 years for males and 13.6 years for females.

In the future, according to the middle assumption in the latest population projections, life expectancy will continue to increase in Canada, as it also will elsewhere in the world.

Life expectancy grew steadily throughout the twentieth century

Since the start of the last century, the life expectancy of Canada’s population has grown substantially. Between 1926 and 2005, males gained 20.0 additional years of life, while females gained an additional 22.7 years

In 2005, life expectancy at birth of Canadian females was 82.7 years, an increase of 0.8 years over 2000. Among Canadian males, life expectancy at birth was somewhat lower in 2005, at 78.0 years, but the increase since 2000 was greater at 1.4 years. As has been the case since 1979, the gap between the life expectancy at birth of males and females continued to decrease in recent years, differing by 4.7 years in 2005.

According to the medium mortality assumption in the most recent population projections, the life expectancy at birth of Canadian males and females would reach respectively 81.9 and 86.0 years in 2031.

In Canada, 84% of males and 90% of females reach at least age 65

By applying mortality levels for a given year to a synthetic cohort of 100 individuals, it is possible to obtain a curve showing the number of survivors at each age and thus get an idea of the speed of the cohort’s extinction. When the curves for 2001 and 1931 are compared, it becomes clear that Canadian males and females today are surviving in greater numbers to advanced ages. With the mortality that prevailed in 1931, less than 60% of males survived to age 65, compared to 84% with the 2001 mortality. In turn, the proportion of females who survived to age 65 was 62% in 1931; it exceeded 90% in 2001.

The above information is from a report issued by the Canadian Government called the “Canadian Demographics at a Glance” This report is designed to present a maximum of demographic information, giving users an up-to-date picture of the various aspects of the Canadian population. Each page of the document contains a chart or table, accompanied by a brief analytical commentary. Most of the charts contain both historical statistics and the most recent projections, so that phenomena can be analysed within a fairly broad time frame. It is intended for a variety of users… Please click here to read the full report.

Stock Market Risk

The five to ten years just prior to or following the time you retire are critical: major fluctuations in the value of your portfolio during this time may have a dramatic impact on your whole retirement because you won’t have the time required to make up any losses and you will be obliged to start making withdrawals. Therefore, the quality of your retirement may be greatly affected.

With the possibility of retirement lasting 30 years or more, most people cannot afford to avoid the markets completely.

If a person knew in advance that the value of retirement funds would sharply decline soon after retirement, he or she could take precautions to help protect savings. Unfortunately, no one can predict market volatility. Addressing these potential concerns before retirement is critical. The stakes are high during retirement—steady employment can no longer shield the investor from relying upon savings for income.

Inflation Risk

Inflation erodes the purchasing power of money. Even with a low annual inflation rate of 2 per cent (the midpoint of the Bank of Canada’s 1 to 3 per cent target range for inflation since 1995), a dollar will lose half of its purchasing power in approximately 35 years. When the consumer price index (CPI) is used to measure inflation, the average annual rate of inflation in Canada since 1914 is 3.2 per cent. Thus, the Canadian dollar lost more than 94 per cent of its value between 1914 and 2005. Alternatively, one dollar in 1914 would have the purchasing power of $17.75 in 2005 dollars.

Claudio's Tip!

"As you prepare for retirement, it’s important to recognize and plan for not only the risk that your investments will not perform as expected, but the risk that your retirement may be longer or more expensive than expected"

Investment Industry Regulatory Organization of Canada (IIROC)

Canadian Investor Protection Fund

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